when to reset SWR basis

[GrayHare]

As I understand it, the standard 4% SWR rule allows withdrawal of 4% of asset value during the first year, then permits annual adjustments in withdrawal amount to keep pace with inflation. This limitation of withdrawal increases to inflation provides protection against future downward moves in asset values.

Is there a point at which it is reasonable to reset the original basis of the 4%? With inflation low this decade at the same time stock prices have doubled and tripled, continuing to strictly limit annual withdrawal increases to inflation makes for tiny withdrawals relative to new asset values. If I started at 4% SWR in 2010, by 2018 my withdrawal, even with inflation adjustment, has become less than 2% of the assets. It seems some reset of my SWR basis is in order (no?), especially given that presumably I have 8 fewer years of life remaining.

 

[REWahoo]

Theoretically, you should be able to reset your SWR at any time. Use 4% of the new portfolio value, and adjust for your decreased future lifespan. Enjoy!

Since retiring in 2005 I've re-run FIRECalc a number of times using new portfolio numbers and decreased years. No surprise, it gave me a raise! Except for 2008 - 2013 or thereabouts...

 

[KCGeezer]

We're only 3 yrs into retirement but my personal guidelines are that a 25% variance +/- in the projected total investable assets will trigger an adjustment. I have 3 defined budgets (plus SHTF budgets) that should handle planned, adjust up and adjust down scenarios. I'll consider a 'has to be over/under for a year' rule if/when an adjustment is warranted.

 

[RunningBum]

Theoretically, yes, but that seems to be asking to set yourself up for a failure scenario where you start a sequence at a market high and hit a bad sequence of returns. Presumably you have some fat in your budget and could reset it with a lower portfolio if that happens.


I think if your intention is to reset your SWR, you should consider using VPW. https://www.bogleheads.org/wiki/Variable_percentage_withdrawal I slowly increase my WR rate each year, multiplying it by my start of the year portfolio value. If I had a good year previously, I can withdraw more, but only that small % more. If I had a bad year, it's a small adjustment downward.


I started at 3% and increase by .05% each year. At some point I increase by .10, and later a bit more. By age 100, I'm at 10.10%. This is a lot more conservative than what Bogleheads shows. I didn't feel comfortable going to 100% at age 99. I'm pretty certain I won't be spending my last dime in my last breath, which is fine with me.

 

[REWahoo]

Theoretically, yes, but that seems to be asking to set yourself up for a failure scenario where you start a sequence at a market high and hit a bad sequence of returns.

Isn't that already built into the 95% success factor - the 5% failure rate?

History says a bad sequence of returns in the first few years is bad news and I don't think it matters if where you started was a market high or not.

 

[cooch96]

The 4% rule, as explained to me, means you can take the greater of either 4% of your existing portfolio or 4% of your original portfolio plus inflation.

So let’s say in year one, 4% = $100k.
In year two your portfolio does well and inflation is minor. The new 4%=$110k and 4% original + inflation = $102k. You take the $110k. You’re portfolio doesn’t have memory.
But if your assets dive in year two, you get to take $102k even if that’s 6% of your current portfolio.

 

[Independent]

As I understand it, the standard 4% SWR rule allows withdrawal of 4% of asset value during the first year, then permits annual adjustments in withdrawal amount to keep pace with inflation. This limitation of withdrawal increases to inflation provides protection against future downward moves in asset values.

Is there a point at which it is reasonable to reset the original basis of the 4%? With inflation low this decade at the same time stock prices have doubled and tripled, continuing to strictly limit annual withdrawal increases to inflation makes for tiny withdrawals relative to new asset values. If I started at 4% SWR in 2010, by 2018 my withdrawal, even with inflation adjustment, has become less than 2% of the assets. It seems some reset of my SWR basis is in order (no?), especially given that presumably I have 8 fewer years of life remaining.

Your original 4% included a 5% chance of completely exhausting your assets during a 30 year period

With good investment returns over the first 8 years, you are probably now in the 100% success subset of the original 117 years used when backtesting the 4%.

I wouldn't want to go all the way up to 4% of current assets, because that reintroduces the 5% failure that I am now positioned to avoid.

I might go back to FireCalc and ask for a maximum withdrawal that gives me 100% success, starting with my current assets. Note that, since I've lived 8 years, my estimated date at death has also moved. I wouldn't run 22 years, but maybe 25 (you could look at some mortality tables and get an idea).

I might also ask if I want to put in a target estate.

Basically, spread the good news around. Some to higher success rate, some to more payout, some (possibly) to more ending assets.

 

[RunningBum]

Isn't that already built into the 95% success factor - the 5% failure rate?

History says a bad sequence of returns in the first few years is bad news and I don't think it matters if where you started was a market high or not.

Maybe I'm wrong, but I have this notion that there are at least potentially some starting points that will lead to failure. The more often you reset your SWR, the more likely you are to start at one of those points. Kind of like a Russian roulette.

 

[REWahoo]

Kind of like a Russian roulette.

Which is exactly like early retirement - keep playing and you'll end up dead!

 

[Independent]

The 4% rule, as explained to me, means you can take the greater of either 4% of your existing portfolio or 4% of your original portfolio plus inflation.

So let’s say in year one, 4% = $100k.
In year two your portfolio does well and inflation is minor. The new 4%=$110k and 4% original + inflation = $102k. You take the $110k. You’re portfolio doesn’t have memory.
But if your assets dive in year two, you get to take $102k even if that’s 6% of your current portfolio.

I'm not sure who did the explaining, but I'd suggest you go back to that person and ask to see the testing he/she has done on that strategy.

I'm sure that FireCalc uses the withdrawal pattern described in the OP. All the other calculators I've seen use that approach.

I wrote my own calculator some years ago and tested some variations on "Greater of X% of inflation adjusted original balance and Y% of current balance." I'm sure that X=Y=4 didn't work in my calculator. Though, IIRC, X=3 and Y=5 did have a 95% success rate.

 

[RunningBum]

Which is exactly like early retirement - keep playing and you'll end up dead!

Yeah, I'd rather not end up dead because I had to sleep in a cardboard box.

 

[RetiredGypsy]

Wrong thread

 

[RetiredGypsy]

RetiredGypsy, that's good information but did you intend to post it in a thread about safe withdrawal rates? I think it deserves a separate thread for discussion.

You caught me before my ninja edit.

I meant it for the credit cards with perks thread, which is open in another tab.

 

[Major Tom]

Your original 4% included a 5% chance of completely exhausting your assets during a 30 year period

With good investment returns over the first 8 years, you are probably now in the 100% success subset of the original 117 years used when backtesting the 4%.

I wouldn't want to go all the way up to 4% of current assets, because that reintroduces the 5% failure that I am now positioned to avoid.

Exactly what I was thinking. If you want to perform fairly regular resets in rising markets, why not try a 3% WR, for instance, to give yourself some wiggle room in case you happen to be resetting at a peak in the market? Even if you don't run out of money, pushing your luck could result in some true character-testing portfolio lows. How low do you think you can go and still enjoy your retirement?

I retired early, in my mid 40's, so the highest I'll be prepared to go before I become a true senior citizen, is around 2.5%. Why push it - unless you genuinely enjoy the thrill of the ride?

 

[pb4uski]

I'm more concerned with dying rich and lamenting not spending/enjoying our money as much as we could have than I am concerned with dying broke. As a result, I'm ratcheting every few years and if the sequence of returns bear appears then I'll adjust as needed or perhaps start SS earlier than FRA.

 

[rodi]

I've thought about this a lot. There are several members here (Chuckanut, Audrey, and W2R come to mind) who do not do the % of original portfolio - adjusted for inflation... They do % of current portfolio.

So after a bad year, they withdraw less. After a good year they withdraw more. There have been lots of discussions. I think Audrey puts her unused portion in a rainy day fund, outside the portfolio. W2R returns any unused portion back to the portfolio.

I haven't increased my WR since retiring since it seems to be enough. We have other income sources that cover about half of our spending. The portfolio is significantly larger than it was in 2014 when I pulled the trigger.

Also, like some other folks here, I have to manage taxable income... and my withdrawals are coming from mostly pre-tax money... an inherited IRA and DH's IRAs... (I'm under 59.5). I did not have a huge buffer of after tax money. I'm Roth converting and need to cover taxes on the conversion from my annual spending... So pulling more money out means paying more taxes... which also affects FAFSA stuff (kids in HS getting ready for college) and ACA premium tax credits... Lots of tax cliffs I want to avoid.

I've toyed with withdrawing more... and have that in my back pocket if I need it.... but fear of tax cliffs, Sequence of Returns risk, etc keeps me from pulling the trigger.

I will probably loosen my purse strings when the kids are launched and I'm closer to medicare... but that's not for a while.

 

[Independent]

I'm more concerned with dying rich and lamenting not spending/enjoying our money as much as we could have than I am concerned with dying broke. As a result, I'm ratcheting every few years and if the sequence of returns bear appears then I'll adjust as needed or perhaps start SS earlier than FRA.

Would VPW be more appropriate for your financial situation and preferences than a flat SWR?

 

[razztazz]

Exactly what I was thinking. If you want to perform fairly regular resets in rising markets, why not try a 3% WR, for instance, to give yourself some wiggle room in case you happen to be resetting at a peak in the market? Even if you don't run out of money, pushing your luck could result in some true character-testing portfolio lows. How low do you think you can go and still enjoy your retirement?

I retired early, in my mid 40's, so the highest I'll be prepared to go before I become a true senior citizen, is around 2.5%. Why push it - unless you genuinely enjoy the thrill of the ride?

If one is repeatedly re-calibrating the 4% rate would they not also have to shorten their survival horizon? If I am 8 years into ER and due to goodie-good-goodie returns leading to a fatter than expected bank account, now I only have to worry about it lasting 22 more years, not thirty. You are always burning the candle from one end but not always from the other end.

 

[REWahoo]

If one is repeatedly re-calibrating the 4% rate would they not also have to shorten their survival horizon? If I am 8 years into ER and due to goodie-good-goodie returns leading to a fatter than expected bank account, now I only have to worry about it lasting 22 more years, not thirty. You are always burning the candle from one end but not always from the other end.

Yep. See post #2 above.

 

[VanWinkle]

I'm more concerned with dying rich and lamenting not spending/enjoying our money as much as we could have than I am concerned with dying broke. As a result, I'm ratcheting every few years and if the sequence of returns bear appears then I'll adjust as needed or perhaps start SS earlier than FRA.

Sounds like a very flexible plan with options for any market condition.

 

[pb4uski]

Would VPW be more appropriate for your financial situation and preferences than a flat SWR?

Not sure... something that I should look into though.

 

[cathy63]

If one is repeatedly re-calibrating the 4% rate would they not also have to shorten their survival horizon? If I am 8 years into ER and due to goodie-good-goodie returns leading to a fatter than expected bank account, now I only have to worry about it lasting 22 more years, not thirty. You are always burning the candle from one end but not always from the other end.

Yes, you should shorten your horizon, but not all the way down to 22. If x was your age when you retired, then now that you've made it to x+8, your life expectancy has increased beyond x+30, but not all the way to x+38. I.e. if you burn that candle from both ends, do it more slowly from the far end.

 

[flintnational]

Yes. In theory you can reset your SWR to take advantage of higher portfolio values. John Greaney, at Retire early home page, explains the process in this article, The Payout Period Reset Method. He argues that the 4% SWR still holds, but on average you will decrease your terminal portfolio value compared to the original model.

And, if you think about it, this has to be true. Otherwise someone retiring today with your same current portfolio value would not be able to use the 4% rule.

 

[pb4uski]

Exactly. The 4% rule doesn't give a hoot if the owner is retiring for the first time or is ratcheting after being retired for a while.

 

[GrayHare]

Yes. In theory you can reset your SWR to take advantage of higher portfolio values. John Greaney, at Retire early home page, explains the process in this article, The Payout Period Reset Method. He argues that the 4% SWR still holds, but on average you will decrease your terminal portfolio value compared to the original model.

And, if you think about it, this has to be true. Otherwise someone retiring today with your same current portfolio value would not be able to use the 4% rule.

I've been pondering exactly that, but have been concerned that resetting reexposes one to the sequence of returns risk.